<PAGE>
PRIME INCOME TRUST TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS SEPTEMBER 30, 1996
DEAR SHAREHOLDER:
When the current fiscal year began on October 1, 1995, the U.S. economy was
growing at a slow-to-moderate pace, inflationary pressures were non-existent and
interest rates were declining. This scenario continued into the new calendar
year. However, by February, stronger-than-anticipated employment reports,
combined with robust housing, automobile and retail sales, ignited inflationary
fears and caused intermediate- and long-term interest rates to edge higher.
Higher food and energy costs did little to allay the bond market's concerns.
Further contributing to the bond market's lackluster performance during the
period was investor anxiety over a possible Federal Reserve Board tightening.
This trend continued into the second half of the period as new data on
employment, durable goods orders and GDP confirmed the continuation of the
economic expansion. Inflation pressures, while not yet visible in the consumer
or producer price indices, began creeping up. Throughout the third quarter of
1996, the fixed-income markets braced themselves for an imminent Federal Reserve
Board tightening. However, at their September 24, 1996 meeting, the Fed decided
against raising rates, apparently in the belief that the economy is likely to
slow enough to keep inflation in check.
PERFORMANCE AND PORTFOLIO
Against this backdrop, Prime Income Trust continued to provide investors with a
high level of current income consistent with the preservation of capital. For
the twelve-month period ended September 30, 1996, the Trust produced a total
return of 7.25 percent. Prime Income Trust's yield seeks to track the movements
in the short-term interest rates, primarily the prime and Libor (London
Inter-Bank Offered Rate) rates. During the period under review, the prime rate
declined from 8.75 to 8.25 percent. During the same period, the three-month
Libor rate declined from 6.00 percent to 5.50 percent.
Prime Income Trust seeks to limit fluctuations in its share price due to changes
in interest rates. Unlike many fixed-income securities which
<PAGE>
PRIME INCOME TRUST
LETTER TO THE SHAREHOLDERS SEPTEMBER 30, 1996, CONTINUED
offer fixed interest rates, the rates on the Trust's portfolio loans are
adjusted periodically, generally every three months. However, the Trust's net
asset value declined to $9.94 during the reporting period as a result of the
Trust's sale of its investment in Wherehouse Entertainment, which had been in
bankruptcy for six months prior to the sale and carried on the Trust's books at
a discount. The Trust's position was eliminated after careful consideration by
the portfolio manager.
Overall the Trust's portfolio remains well diversified with over 80 loans,
spread out over 48 industry groups. Throughout the year, the Trust has remained
out of the paper and pulp industry, where prices for loans in this sector have
moved down.
Transaction flow was up for the year, both in the number of transactions and the
dollar volume generated, though transactions came in waves. Given the
availability of monies from equity sponsor groups and the supply of credit from
lending institutions, we expect comparable transaction flow over the next six
months.
LOOKING AHEAD
For the balance of 1996 and early 1997, we expect that U.S. economic growth will
continue to be moderate. Before taking overt action to slow the economy, the
Federal Reserve Board is likely to look for sustained confirmation of a strong
economy and rising inflation. In the months ahead, inflation is expected to
remain subdued, albeit at slightly higher levels than in 1995 and 1996.
We appreciate your support of Prime Income Trust and look forward to continuing
to serve your investment needs.
Very truly yours,
[SIGNATURE]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SENIOR COLLATERALIZED TERM LOANS (a) (93.0%)
ADVERTISING (3.3%)
$ 7,250 Eller Media Co.......................... 8.69% 12/21/03 $ 7,249,637
5,844 Outdoor Systems, Inc.................... 9.03 12/31/02 5,844,101
5,844 Outdoor Systems, Inc.................... 9.03 12/31/03 5,844,101
12,000 Treasure Chest Advertising Co., Inc..... 7.94 12/31/02 12,000,000
---------------
30,937,839
---------------
AEROSPACE (1.3%)
561 Gulf Stream Aerospace Corp.............. 7.63 03/31/97 560,565
2,900 Gulf Stream Aerospace Corp.............. 8.69 03/31/98 2,899,043
5,608 Howmet Corp............................. 8.50 11/20/02 5,608,102
3,105 Howmet Corp............................. 8.75 05/20/03 3,104,820
---------------
12,172,530
---------------
AIR FREIGHT (1.1%)
5,000 Continental Micronesia, Inc.
(Participation: Bankers Trust Co.)
(b)..................................... 7.25 07/31/01 4,998,550
5,000 Continental Micronesia, Inc............. 7.25 07/31/01 4,998,550
---------------
9,997,100
---------------
APPAREL (1.9%)
866 Anvil Knitwear, Inc..................... 7.94 02/03/01 866,718
8,936 Anvil Knitwear, Inc..................... 8.94 to 10.25 02/02/02 8,934,967
4,525 Hosiery Corporation of America, Inc..... 8.75 to 9.06 07/31/01 4,525,043
277 London Fog Industries, Inc.*............ 0.00 05/31/02 263,580
2,823 London Fog Industries, Inc.............. 9.25 + 05/31/02 2,681,831
581 London Fog Industries, Inc. (c)......... 12.50 05/31/02 551,691
---------------
17,823,830
---------------
AUTO PARTS (1.8%)
9,444 Hayes Wheels International, Inc......... 8.47 to 8.60 07/31/03 9,444,603
7,555 Hayes Wheels International, Inc......... 8.97 to 9.10 07/31/04 7,555,580
---------------
17,000,183
---------------
BEVERAGES - SOFT DRINKS (1.1%)
3,960 Select Beverages, Inc................... 8.75 to 9.06 06/30/01 3,959,557
5,940 Select Beverages, Inc................... 9.00 to 9.19 06/30/02 5,939,403
---------------
9,898,960
---------------
BREWERS (1.6%)
15,000 The Stroh Brewery Co.................... 8.56 06/30/01 15,000,000
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
BROADCAST MEDIA (4.1%)
$ 3,500 Benedek Broadcasting Corp............... 8.50% 05/01/01 $ 3,500,070
3,500 Benedek Broadcasting Corp............... 9.00 11/01/02 3,500,070
4,971 Chancellor Broadcasting Co.............. 8.25 09/01/03 4,971,528
10,000 Citicasters, Inc........................ 8.19 09/18/04 9,999,900
9,587 River City Broadcasting, L.P............ 8.63 12/31/99 9,587,239
6,522 Silver King Communications, Inc......... 8.44 07/31/02 6,521,457
---------------
38,080,264
---------------
BUILDING MATERIALS (1.3%)
12,479 National Gypsum Co...................... 7.84 to 8.00 09/30/03 12,478,470
---------------
BUSINESS SERVICES (1.7%)
8,000 Experian Information Solutions, Inc..... 8.63 09/18/03 7,999,600
8,000 Experian Information Solutions, Inc..... 9.13 09/18/04 7,999,520
---------------
15,999,120
---------------
CABLE TELEVISION EQUIPMENT (1.1%)
10,000 Marcus Cable Operating Co. L.P.......... 8.22 to 8.44 04/30/04 10,000,347
---------------
CABLE/CELLULAR (5.9%)
10,000 Charter Communications Entertainment I,
L.P..................................... 8.25 12/31/04 10,000,100
25,000 Nextel Communications, Inc.............. 10.25 06/30/03 25,000,000
20,000 Western Wireless Corp................... 8.31 03/31/05 19,999,800
---------------
54,999,900
---------------
COAL (0.7%)
7,000 Alliance Coal Corp...................... 8.88 12/31/02 6,999,650
---------------
CONSUMER PRODUCTS (1.7%)
6,411 Chattem, Inc............................ 8.23 to 10.50 10/29/03 6,412,501
10,000 Revlon Consumer Products Corp........... 8.00 to 8.19 03/31/99 9,998,854
---------------
16,411,355
---------------
CONTAINERS (1.8%)
16,794 Silgan Corporations..................... 8.53 to 8.75 03/15/02 16,791,581
---------------
CONVENIENCE STORES (1.0%)
9,456 Cumberland Farms, Inc. (Participation:
Merrill Lynch & Co., Inc.) (b).......... 8.75 12/31/98 9,455,898
---------------
DRUG STORES (1.2%)
7,500 Duane Reade, Inc........................ 9.50 12/31/99 7,498,950
3,549 M & H Drugs, Inc........................ 9.63 12/31/96 3,548,835
---------------
11,047,785
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ELECTRONICS (1.1%)
$ 6,000 Details, Inc............................ 8.50% 01/31/02 $ 5,997,300
3,975 Vernitron Corp.......................... 9.38 to 10.50 04/25/02 3,975,119
---------------
9,972,419
---------------
ENTERTAINMENT & LEISURE TIME (4.4%)
10,726 AMF Group, Inc.......................... 8.44 03/31/03 10,724,163
4,228 AMF Group, Inc.......................... 8.69 03/31/04 4,227,372
14,438 Orion Pictures Corp..................... 8.06 to 8.13 06/30/01 14,437,261
11,707 Six Flags Theme Parks, Inc.............. 8.44 06/23/03 11,706,800
---------------
41,095,596
---------------
EQUIPMENT (1.1%)
9,880 Primeco, Inc............................ 8.56 to 8.63 12/31/00 9,878,558
---------------
FOOD PROCESSING (3.2%)
10,973 American Italian Pasta Co............... 9.31 to 9.50 02/27/04 10,967,607
8,839 Keebler Holding Corp.................... 8.38 to 9.19 07/31/03 8,834,682
9,876 Keebler Holding Corp.................... 8.63 to 9.19 07/31/04 9,873,811
---------------
29,676,100
---------------
FOOD SERVICES (3.7%)
6,743 Rykoff-Sexton, Inc...................... 8.63 10/31/02 6,743,041
3,236 Rykoff-Sexton, Inc...................... 8.88 04/30/03 3,236,357
5,880 SC International Services, Inc. &
Caterair International Corp............. 8.50 to 8.63 09/15/01 5,879,651
7,333 SC International Services, Inc. &
Caterair International Corp............. 8.50 to 8.63 09/15/02 7,332,675
1,613 SC International Services, Inc. &
Caterair International Corp............. 8.75 to 8.88 09/15/03 1,612,535
6,652 Volume Services, Inc.................... 8.75 12/31/02 6,651,602
3,326 Volume Services, Inc.................... 9.25 12/31/03 3,325,734
---------------
34,781,595
---------------
FOODS & BEVERAGES (1.7%)
3,125 Restaurants Unlimited, Inc.............. 9.00 06/03/00 3,125,000
7,912 Van de Kamp's, Inc...................... 8.88 to 10.25 04/30/03 7,916,231
4,951 Van de Kamp's, Inc...................... 9.13 to 10.50 09/30/03 4,953,819
---------------
15,995,050
---------------
FUNERAL SERVICES (1.1%)
5,000 Prime Succession, Inc................... 8.49 to 8.68 08/01/03 4,998,455
5,000 Prime Succession, Inc. (Participation:
Goldman Sachs & Co.) (b)................ 8.49 to 8.68 08/01/03 4,999,800
---------------
9,998,255
---------------
GAS-TRUCK STOP (0.4%)
3,682 Petro PSC Properties, L.P............... 8.80 05/24/01 3,680,668
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HEALTHCARE (2.1%)
$ 7,260 Community Health Systems, Inc........... 8.63% 12/31/03 $ 7,260,564
7,260 Community Health Systems, Inc........... 9.13 12/31/04 7,260,492
5,479 Community Health Systems, Inc........... 9.38 12/31/05 5,479,562
---------------
20,000,618
---------------
HOUSEHOLD FURNISHINGS & APPLIANCES (2.0%)
9,875 Graco Children's Products, Inc.......... 10.25 06/30/03 9,875,000
10,000 Lifestyle Furnishings International,
Ltd..................................... 8.50 08/05/04 10,000,100
---------------
19,875,100
---------------
INDUSTRIALS (0.8%)
7,714 UCAR International, Inc................. 7.63 12/31/02 7,714,826
---------------
MANUFACTURING (5.0%)
3,103 C.S. Brooks Canada, Inc................. 8.69 06/30/02 3,103,603
6,897 C.S. Brooks Canada, Inc................. 8.94 06/30/04 6,896,828
9,925 Desa International, Inc................. 7.94 to 8.13 08/31/01 9,925,106
9,980 Desa International, Inc................. 8.44 to 9.50 02/28/03 9,980,274
5,282 InterMetro Industries Corp.............. 8.50 to 8.56 06/30/03 5,282,417
4,108 InterMetro Industries Corp.............. 9.00 to 9.06 06/30/04 4,108,467
8,000 Panavision, Inc......................... 8.69 to 8.94 03/31/04 8,001,104
---------------
47,297,799
---------------
MANUFACTURING - DIVERSIFIED (0.6%)
5,200 Health O'Meter, Inc..................... 8.25 08/15/01 5,199,376
---------------
MEDIA GROUP (1.5%)
13,961 ADVO, Inc............................... 8.57 03/31/04 13,960,692
---------------
MEDICAL PRODUCTS & SUPPLIES (2.6%)
4,909 Dade International, Inc................. 8.75 12/31/02 4,908,845
4,909 Dade International, Inc................. 9.13 12/31/03 4,907,962
5,182 Dade International, Inc................. 9.38 12/31/04 5,180,523
2,727 Medical Specialties Group, Inc.......... 7.42 06/30/01 2,727,273
7,273 Medical Specialties Group, Inc.......... 8.17 06/30/04 7,272,655
---------------
24,997,258
---------------
METALS & MINING (1.0%)
9,000 U.S. Silica Corp........................ 8.88 12/31/03 9,000,270
---------------
MISCELLANEOUS (4.5%)
29,760 Borg-Warner Security Corp............... 8.75 12/31/98 29,758,849
12,865 Pinnacle Brands, Inc.................... 8.79 05/29/02 12,861,357
---------------
42,620,206
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OFFICE EQUIPMENT (0.7%)
$ 6,892 Knoll, Inc.............................. 8.48 to 8.50% 08/31/03 $ 6,891,616
---------------
OIL (0.8%)
7,500 Calciner Industries, Inc................ 8.82 09/30/04 7,498,200
---------------
PAPER PRODUCTS (0.4%)
2,994 Mail-Well Corp.......................... 8.44 07/31/03 2,994,324
1,078 Supermex, Inc........................... 8.44 07/31/03 1,077,823
---------------
4,072,147
---------------
PUBLISHING - BUSINESS (1.6%)
15,000 Advanstar Communications, Inc........... 8.63 12/31/03 15,000,450
---------------
RAILROAD EQUIPMENT (1.0%)
9,750 Johnstown America Industries, Inc....... 8.50 to 9.00 03/31/03 9,752,277
---------------
RECORD & TAPE (0.3%)
4,876 Camelot Music, Inc...................... 9.75 02/28/01 3,022,500
---------------
RETAIL - DEPARTMENT STORES (3.7%)
14,689 Caldor Corp. (Revolver)................. 6.19 to 8.25 12/31/98 14,686,755
14,863 Kmart Corp.............................. 8.00 06/06/99 14,862,945
5,420 Kmart Corp. (Revolver).................. 7.94 to 9.75 06/06/99 5,420,044
---------------
34,969,744
---------------
RETAIL - SPECIALTY (2.5%)
13,400 AnnTaylor, Inc.......................... 8.13 07/29/98 13,400,804
10,000 Kirkland's, Inc......................... 9. 31 to 11.00 06/30/02 10,000,598
---------------
23,401,402
---------------
SPECIALTY PACKAGING (1.1%)
5,940 Calmar, Inc............................. 8.63 to 10.25 09/15/03 5,939,705
4,455 Calmar, Inc............................. 8.88 to 10.50 03/15/04 4,454,778
---------------
10,394,483
---------------
SPORTING GOODS (2.1%)
4,278 E & S Holdings Corp..................... 10.00 09/30/04 4,277,778
4,278 E & S Holdings Corp..................... 10.50 09/30/05 4,277,778
2,444 E & S Holdings Corp..................... 11.00 03/30/06 2,444,444
1,503 Worldwide Sports & Recreation, Inc...... 8.50 to 8.56 04/26/00 1,502,392
7,318 Worldwide Sports & Recreation, Inc...... 9.06 04/26/01 7,316,717
---------------
19,819,109
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SUPERMARKETS (3.6%)
$ 7,716 Food 4 Less Supermarkets, Inc........... 8.50% 06/15/01 $ 7,716,232
2,594 Food 4 Less Supermarkets, Inc........... 9.75 02/15/04 2,594,634
3,227 Food 4 Less Supermarkets, Inc.
(Revolver).............................. 8.19 to 8.31 06/15/01 3,227,916
4,677 Smith's Food & Drug Centers, Inc........ 8.69 11/30/03 4,677,255
4,677 Smith's Food & Drug Centers, Inc........ 9.19 11/30/04 4,677,255
4,677 Smith's Food & Drug Centers, Inc........ 9.44 08/31/05 4,677,255
3,778 Star Markets Company, Inc............... 8.50 12/31/01 3,777,216
2,830 Star Markets Company, Inc............... 9.00 12/31/02 2,829,924
---------------
34,177,687
---------------
TEXTILES (1.1%)
5,000 Blackstone Capital Company II, L.L.C.... 9.00 01/13/97 5,000,100
5,000 Wasserstein/C&A Holdings, L.L.C......... 9.13 01/13/97 4,999,900
---------------
10,000,000
---------------
TOYS (1.5%)
7,241 Ritvik Toys, Inc........................ 8.94 02/08/03 7,240,943
7,241 Ritvik Toys, Inc........................ 9.44 02/08/04 7,240,943
---------------
14,481,886
---------------
WHOLESALE DISTRIBUTOR (1.6%)
14,912 American Marketing Industries, Inc...... 8.94 to 9.13 11/29/02 14,912,142
---------------
WIRE & CABLE (1.6%)
9,939 International Wire Group, Inc........... 8.54 09/30/02 9,938,798
4,981 International Wire Group, Inc........... 8.97 to 9.41 09/30/03 4,981,658
---------------
14,920,456
---------------
TOTAL SENIOR COLLATERALIZED TERM LOANS
(IDENTIFIED COST $873,583,456)....................................... 874,153,297
---------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCK (0.1%)
APPAREL
1,722K London Fog Industries, Inc. 17.50% due 2/28/05 (Series A-1) (Restricted)
(c)
(IDENTIFIED COST $2,175,563)............................................ 1,222,422
---------------
COMMON STOCKS (0.0%)
APPAREL (0.0%)
1,291 London Fog Industries, Inc. (Restricted)................................ --
---------------
FOOD SERVICES (0.0%)
4,209 Flagstar Companies (Restricted)......................................... 8,681
---------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $60,507)............................................... 8,681
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (6.1%)
COMMERCIAL PAPER (d) (4.4%)
INSURANCE
$ 41,000 AIG Funding, Inc.**
(Amortized Cost $40,988,042)............ 5.25% 10/03/96 $ 40,988,042
---------------
REPURCHASE AGREEMENT (1.7%)
15,879 The Bank of New York (dated 09/30/96;
proceeds $15,881,039; collateralized by
$15,862,607 U.S. Treasury Note 5.625%
due 10/31/97 valued at $16,196,411)
(Identified Cost $15,878,834)........... 5.00 10/01/96 15,878,834
---------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $56,866,876)........................................ 56,866,876
---------------
TOTAL INVESTMENTS
(IDENTIFIED COST $932,686,402) (E)........... 99.2 932,251,276
CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES.................................. 0.8 7,219,269
----- ------------
NET ASSETS................................... 100.0% $939,470,545
----- ------------
----- ------------
<FN>
- ---------------------
K In thousands.
* Non-income producing security.
** All or a portion of these securities are segregated in connection with
unfunded loan commitments.
+ 3 percent paid in cash, 6.25 percent payment-in-kind; converts to prime
plus 1 percent cash payment on May 31, 1997.
(a) Floating rate securities. Interest rates shown are those in effect at
September 30, 1996.
(b) Participation: participation interests were acquired through the financial
institutions indicated parenthetically.
(c) Payment-in-kind security.
(d) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(e) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation was $2,769,458 and the
aggregate gross unrealized depreciation was $3,204,584, resulting in net
unrealized depreciation of $435,126.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS:
Investments, at value
(identified cost $932,686,402)............................ $932,251,276
Cash........................................................ 3,709,177
Receivable for:
Interest................................................ 6,710,184
Shares of beneficial interest sold...................... 3,913,682
Prepaid expenses and other assets........................... 446,455
------------
TOTAL ASSETS........................................... 947,030,774
------------
LIABILITIES:
Payable for:
Dividends to shareholders............................... 832,133
Investment advisory fee................................. 689,001
Administration fee...................................... 196,420
Deferred loan fees.......................................... 5,635,444
Accrued expenses and other payables......................... 207,231
Commitments and contingencies (Note 7)...................... --
------------
TOTAL LIABILITIES...................................... 7,560,229
------------
NET ASSETS:
Paid-in-capital............................................. 944,540,145
Net unrealized depreciation................................. (435,126)
Accumulated undistributed net investment income............. 238,827
Accumulated net realized loss............................... (4,873,301)
------------
NET ASSETS............................................. $939,470,545
------------
------------
NET ASSET VALUE PER SHARE,
94,535,310 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED
OF $.01 PAR VALUE)........................................
$9.94
------------
------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Interest.................................................... $62,118,753
Net facility, amendment and other fees...................... 3,749,154
Other income................................................ 223,914
-----------
TOTAL INCOME........................................... 66,091,821
-----------
EXPENSES
Investment advisory fee..................................... 6,524,700
Administration fee.......................................... 1,845,500
Professional fees........................................... 609,473
Transfer agent fees and expenses............................ 447,960
Registration fees........................................... 423,120
Shareholder reports and notices............................. 291,308
Custodian fees.............................................. 90,605
Trustees' fees and expenses................................. 22,462
Other....................................................... 499,224
-----------
TOTAL EXPENSES......................................... 10,754,352
-----------
NET INVESTMENT INCOME.................................. 55,337,469
-----------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................................... (1,507,802)
Net change in unrealized appreciation/ depreciation......... (2,222,920)
-----------
NET LOSS............................................... (3,730,722)
-----------
NET INCREASE................................................ $51,606,747
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................... $ 55,337,469 $ 31,803,245
Net realized loss........................................... (1,507,802) (2,551,571)
Net change in unrealized appreciation/depreciation.......... (2,222,920) 2,716,998
------------------ ------------------
NET INCREASE........................................... 51,606,747 31,968,672
------------------ ------------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................... (55,512,316) (31,409,897)
Net realized gain........................................... -- (957,304)
------------------ ------------------
TOTAL.................................................. (55,512,316) (32,367,201)
------------------ ------------------
Net increase from transactions in shares of beneficial
interest.................................................. 422,015,153 216,725,076
------------------ ------------------
TOTAL INCREASE......................................... 418,109,584 216,326,547
NET ASSETS:
Beginning of period......................................... 521,360,961 305,034,414
------------------ ------------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$238,827 AND $413,674, RESPECTIVELY).................... $939,470,545 $521,360,961
------------------ ------------------
------------------ ------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net investment income................................................................. $ 55,337,469
Adjustments to reconcile net investment income to net cash from operating activities:
Increase in receivables and other assets related to operations........................ (2,269,978)
Increase in payables related to operations............................................ 342,841
Net loan fees received................................................................ 5,812,854
Amortization of loan fees............................................................. (3,749,154)
Accretion of discounts................................................................ (1,045,950)
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................ 54,428,082
---------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of investments.............................................................. (853,386,468)
Principal repayments/sales of investments............................................. 466,386,119
Net sales/maturities of short-term investments........................................ (35,840,134)
---------------
NET CASH USED FOR INVESTING ACTIVITIES........................................... (422,840,483)
---------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Shares of beneficial interest sold.................................................... 452,558,801
Shares tendered....................................................................... (56,517,971)
Dividends from net investment income (net of reinvested dividends of $26,959,275)..... (27,941,451)
---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................................ 368,099,379
---------------
NET DECREASE IN CASH.................................................................. (313,022)
CASH AT BEGINNING OF YEAR............................................................. 4,022,199
---------------
CASH BALANCE AT END OF YEAR........................................................... $ 3,709,177
---------------
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
Prime Income Trust (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as a non-diversified, closed-end management investment
company. The Trust's investment objective is to provide a high level of current
income consistent with the preservation of capital. The Trust was organized as a
Massachusetts business trust on August 17, 1989 and commenced operations on
November 30, 1989.
The Trust offers and sells its shares to the public on a continuous basis. The
Trustees intend, each quarter, to consider authorizing the Trust to make tender
offers for all or a portion of its outstanding shares of beneficial interest at
the then current net asset value of such shares.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates. The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) The Trustees believe that, at present, there
are not sufficient market quotations provided by banks, dealers or pricing
services respecting interests in senior collateralized loans ("Senior Loans") to
corporations, partnerships and other entities ("Borrower") to enable the Trust
to properly value Senior Loans based on available market quotations.
Accordingly, until the market for Senior Loans develops, interests in Senior
Loans held by the Trust are valued at their fair value in accordance with
procedures established in good faith by the Trustees. Under the procedures
adopted by the Trustees, interests in Senior Loans are priced using a matrix
which takes into account the relationship between current interest rates and
interest rates payable on each Senior Loan, as well as the total number of days
in each interest period and the period remaining until the next interest rate
determination or maturity of the Senior Loan. Adjustments in the matrix-
determined price of a Senior Loan will be made in the event of a default on a
Senior Loan or a significant change in the creditworthiness of the Borrower. The
fair values determined in accordance with these procedures may differ
significantly from the market values that would have been used had a ready
market for the Senior Loans existed; (2) portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest bid price; (3) short-term debt securities having a maturity date of more
than sixty days at time of purchase are valued on a mark-to-market basis until
sixty days prior to maturity and thereafter at amortized cost based on their
value on the 61st day. Short-term debt securities having a maturity date of
sixty days or less at the
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996, CONTINUED
time of purchase are valued at amortized cost; and (4) all other securities and
other assets are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Trustees.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Interest income is accrued daily except where collection is not expected. When
the Trust buys an interest in a Senior Loan, it may receive a facility fee,
which is a fee paid to lenders upon origination of a Senior Loan and/or a
commitment fee which is paid to lenders on an ongoing basis based upon the
undrawn portion committed by the lenders of the underlying Senior Loan. The
Trust amortizes the facility fee and accrues the commitment fee over the
expected term of the loan. When the Trust sells an interest in a Senior Loan, it
may be required to pay fees or commissions to the purchaser of the interest.
Fees received in connection with loan amendments are amortized over the expected
term of the loan.
C. SENIOR LOANS -- The Trust invests primarily in Senior Loans to Borrowers.
Senior Loans are typically structured by a syndicate of lenders ("Lenders"), one
or more of which administers the Senior Loan on behalf of the Lenders ("Agent").
Lenders may sell interests in Senior Loans to third parties ("Participations")
or may assign all or a portion of their interest in a Senior Loan to third
parties ("Assignments"). Senior Loans are exempt from registration under the
Securities Act of 1933. Presently, Senior Loans are not readily marketable and
are often subject to restrictions on resale.
D. FEDERAL INCOME TAX STATUS -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996, CONTINUED
income or distributions in excess of net realized capital gains. To the extent
they exceed net investment income and net realized capital gains for tax
purposes, they are reported as distributions of paid-in-capital.
2. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement with Dean Witter InterCapital Inc.
(the "Investment Adviser"), the Trust pays the Investment Adviser an advisory
fee, accrued daily and payable monthly, by applying the following annual rates
to the net assets of the Trust determined as of the close of each business day:
0.90% to the portion of the daily net assets not exceeding $500 million and
0.85% to the portion of the daily net assets exceeding $500 million.
Under the terms of the Agreement, in addition to managing the Trust's
investments, the Investment Adviser pays the salaries of all personnel,
including officers of the Trust, who are employees of the Investment Adviser.
3. ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement with Dean Witter Services Company Inc.
(the "Administrator"), the Trust pays an administration fee, calculated daily
and payable monthly, by applying the annual rate of 0.25% to the Trust's daily
net assets.
Under the terms of the Administration Agreement, the Administrator maintains
certain of the Trust's books and records and furnishes, at its own expense,
office space, facilities, equipment, clerical, bookkeeping and certain legal
services and pays the salaries of all personnel, including officers of the Trust
who are employees of the Administrator. The Administrator also bears the cost of
telephone services, heat, light, power and other utilities provided to the
Trust.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended September 30, 1996 aggregated
$852,805,805 and $465,950,751, respectively.
Shares of the Trust are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator.
Pursuant to a Distribution Agreement between the Trust, the Investment Adviser
and the Distributor, the Investment Adviser compensates the Distributor at an
annual rate of 2.75% of the purchase price of shares purchased from the Trust.
The Investment Adviser will compensate the Distributor at an annual rate of
0.10% of the value of shares sold for
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996, CONTINUED
any shares that remain outstanding after one year from the date of their initial
purchase. Any early withdrawal charge to defray distribution expenses will be
charged to the shareholder in connection with shares held for four years or less
which are accepted by the Trust for repurchase pursuant to tender offers. For
the year ended September 30, 1996, the Investment Adviser has informed the Trust
that it received approximately $728,000 in early withdrawal charges.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Trust's transfer agent. At September 30, 1996, the Trust
had transfer agent fees and expenses payable of approximately $45,000.
The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended September 30, 1996
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,907. At September 30, 1996, the Trust had an accrued pension liability of
$45,562 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
---------------- ----------------
<S> <C> <C>
Balance, September 30, 1994...................................... 30,489,594 $ 305,799,916
Shares sold...................................................... 24,363,027 243,262,814
Shares issued to shareholders for reinvestment of dividends and
distributions................................................... 1,605,098 16,029,070
Shares tendered (four quarterly tender offers)................... (4,259,745) (42,566,808)
---------------- ----------------
Balance, September 30, 1995...................................... 52,197,974 522,524,992
Shares sold...................................................... 45,304,780 451,573,849
Shares issued to shareholders for reinvestment of dividends...... 2,706,326 26,959,275
Shares tendered (four quarterly tender offers)................... (5,673,770) (56,517,971)
---------------- ----------------
Balance, September 30, 1996...................................... 94,535,310 $ 944,540,145
---------------- ----------------
---------------- ----------------
</TABLE>
On October 25, 1996, the Trustees approved a tender offer to purchase up to 4
million shares of beneficial interest to commence on November 20, 1996.
6. FEDERAL INCOME TAX STATUS
At September 30, 1996, the Trust had a net capital loss carryover of
approximately $4,140,000 of which $1,384,000 will be available through September
30, 2003 and $2,756,000 will be available through September 30, 2004 to offset
future capital gains to the extent provided by regulations.
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996, CONTINUED
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Trust's next
taxable year. The Trust incurred and will elect to defer net capital losses of
approximately $557,000 during fiscal 1996.
As of September 30, 1996, the Trust had temporary book/tax differences primarily
attributable to post-October losses and market discount on revolver loans.
7. COMMITMENTS AND CONTINGENCIES
As of September 30, 1996, the Trust had unfunded loan commitments pursuant to
the following loan agreements:
<TABLE>
<CAPTION>
UNFUNDED
BORROWER COMMITMENT
- ----------------------------------------------------------------- ----------------
<S> <C>
Caldor Corp...................................................... $ 6,320,287
Kmart Corp....................................................... 19,580,000
Food 4 Less Supermarkets, Inc.................................... 12,911,563
----------------
$ 38,811,850
----------------
----------------
</TABLE>
8. FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK
When the Trust purchases a Participation, the Trust typically enters into a
contractual relationship with the Lender or third party selling such
Participation ("Selling Participant"), but not with the Borrower. As a result,
the Trust assumes the credit risk of the Borrower, the Selling Participant and
any other persons interpositioned between the Trust and the Borrower
("Intermediate Participants") and the Trust may not directly benefit from the
collateral supporting the Senior Loan in which it has purchased the
Participation. Because the Trust will only acquire Participations if the Selling
Participant and each Intermediate Participant is a financial institution, the
Trust may be considered to have a concentration of credit risk in the banking
and brokerage industry. At September 30, 1996, such Participations had a fair
value of $19,454,248.
The Trust will only invest in Senior Loans where the Investment Adviser believes
that the Borrower can meet debt service requirements in a timely manner and
where the market value of the collateral at the time of investment equals or
exceeds the amount of the Senior Loan. In addition, the Trust will only acquire
Participations if the Selling Participant, and each Intermediate Participant, is
a financial institution which meets certain minimum creditworthiness standards.
<PAGE>
PRIME INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 30,
FOR THE YEAR ENDED SEPTEMBER 30 1989* THROUGH
---------------------------------------------------------------- SEPTEMBER 30,
1996 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period............... $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00 $ 10.00
--------- --------- --------- --------- --------- --------- ------
Net investment income.............. 0.74 0.82 0.62 0.55 0.62 0.84 0.74
Net realized and unrealized gain
(loss)............................ (0.04) 0.01 0.09 (0.08) (0.01) -- (0.01)
--------- --------- --------- --------- --------- --------- ------
Total from investment operations... 0.70 0.83 0.71 0.47 0.61 0.84 0.73
--------- --------- --------- --------- --------- --------- ------
Less dividends and distributions
from:
Net investment income........... (0.75) (0.81) (0.62) (0.55) (0.62) (0.84) (0.73)
Net realized gain............... -- (0.03) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ------
Total dividends and
distributions..................... (0.75) (0.84) (0.62) (0.55) (0.62) (0.84) (0.73)
--------- --------- --------- --------- --------- --------- ------
Net asset value, end of period..... $ 9.94 $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00
--------- --------- --------- --------- --------- --------- ------
--------- --------- --------- --------- --------- --------- ------
TOTAL INVESTMENT RETURN+........... 7.25% 8.57% 7.32% 4.85% 6.23% 8.77% 7.57%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... 1.46% 1.52% 1.60% 1.45% 1.47% 1.52% 1.48%(2)
Net investment income.............. 7.50% 8.11% 6.14% 5.53% 6.14% 8.23% 8.95%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands......................... $939,471 $521,361 $305,034 $311,479 $413,497 $479,941 $328,189
Portfolio turnover rate............ 72% 102% 147% 92% 46% 42% 35%(1)
<FN>
- ---------------------
* Commencement of operations.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
Dividends and distributions are assumed to be reinvested at the prices
obtained under the Trust's dividend reinvestment plan.
(1) Not annualized.
(2) Annualized.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF PRIME INCOME TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of Prime Income Trust
(the "Trust") at September 30, 1996, the results of its operations and its cash
flows for the year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for each of the six
years in the period then ended and for the period November 30, 1989
(commencement of operations) through September 30, 1990, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1996 by
correspondence with the custodian and, with respect to senior collateralized
loans, the selling participants and agent banks, provide a reasonable basis for
the opinion expressed above.
As explained in Note 1, the financial statements include senior collateralized
loans valued at $874,153,297 (93 percent of net assets), which values have been
estimated by the Trustees in the absence of readily ascertainable market values.
We have reviewed the procedures used by the Trustees in arriving at its
estimates of values of such senior collateralized loans and have inspected
underlying documentation, and, in the circumstances, we believe the procedures
are reasonable and the documentation appropriate. However, those estimated
values may differ significantly from the values that would have been used had a
ready market for the senior collateralized loans existed, and the differences
could be material.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
NOVEMBER 11, 1996
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Sheldon Curtis
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
Rafael Scolari
VICE PRESIDENT
Thomas F. Caloia
TREASURER
CUSTODIAN
The Bank of New York
110 Washington Street
New York, New York 10286
TRANSFER AGENT
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
PRIME INCOME TRUST
ANNUAL REPORT
SEPTEMBER 30, 1996
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and
trustees, fees, expenses and other pertinent information, please see the
prospectus of the Fund. This report is not authorized for distribution to
prospective investors in the Fund unless preceded or accompanied by an
effective prospectus.
